It all seemed to happen in a heartbeat: A struggling industry went from bad to worse as one of its largest members filed for bankruptcy. Panic set in among Hanjin Shipping Co.’s customers over goods stranded at sea and litigation lawyers began lining global ports to pick up the pieces.

Suddenly, the risks posed to container shipping by overcapacity, low profitability, and volatile or inadequate pricing crystalized. What, asked other ocean shippers, did this mean for us?

Jim Blaeser pulled no punches when answering that question. In a study in February of last year, his New York employer AlixPartners warned that piecemeal cost-cutting, vessel-idling or slow-steaming in maritime container shipping would do little to curb overcapacity and stem falling profitability and precarious cash flow.

Jim Blaeser, vice president, AlixPartners

In fact, said the company VP, things would likely only get worse unless industry embraced a major alternative: consolidation.

Was AlixPartners’ prediction borne out? Well partly, said Blaeser. “The first three quarters were dismal as we called out; the fourth quarter when results are published in full by the companies should be considerably better. But I think the jury is out on whether carriers will be able to ride that wave into 2017.”

Blaeser said the idea that higher rates sustained into the Chinese New Year will chase the industry’s blues away were “wishful thinking.”

At the same time, Blaeser said, consolidation will place more and different demands on risk managers.

As fewer operators like Maersk and MSC control more capacity, “you’ll need to have a much stronger global reach for corporate control and command to ensure that your risks are understood and that they’re appropriately mitigated.”

By definition, the focus as a risk manager shifts “from your own backyard to a global field of play,” he said.

Consolidate, Communicate … Convert?

Where that field of play looms particularly large is information.

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“Ocean freight information is just terrible across the board,” said Blaeser. That stems in part from merger integration of companies with “three, four, five systems handling different pieces of information,” such as for truck, terminal and vessel operations.

“I would argue that, as consolidation takes root and there are fewer carriers, inherently information has to get better,” Blaeser said. That may happen as rates improve and companies spend more on effective software information management tools.

Rick Roberts, director of risk management at Connecticut’s Ensign-Bickford Industries (EBI), is sufficiently alarmed by this and other news to have begun reviewing his policies and risk management strategies.

But it’s not just the risk posed by overcapacity, it’s the risk of consolidation itself.

EBI transports hazardous military goods to Europe and pet food to South America. Insufficient information and possible changes in global routes as companies merge their respective customer bases, for example, give him pause.

“I see we’re going to have some issues where routes are changing and how long it could take for our products to get places. Maybe it used to take 10 days to two weeks and now maybe it takes a month.”

For his part, Ali Rizvi, senior vice president at Marsh in Houston, said the three biggest challenges shippers face are fuel, crew and ship management. Consolidation obviously allows merged companies to use crew more efficiently and renegotiate bunker fuels, while economies of scale present opportunities for more efficient operations overall.

Ali Rizvi, senior vice president, Marsh

“But does it solve the problem of overcapacity? We don’t think so,” said Rizvi.

What may help is for the number of relatively newer ships that are scrapped each year to continue or even increase. Another crucial step will be to effectively manage both the skill sets and “culture capital” among combined crew and ship management that can be disturbed or disappear outright when companies merge.

“If you’re merging two shipping companies you want to make sure that their respective HR groups have a synergy and understand each other, put together one team that understands the needs of each of their vessels, their routes, their customers and the ports they call in,” he said.

Rizvi said some companies might consider another option: conversion from cargo to other lines of business. Shipyards, for example, said Rizvi, can’t build cruise ships quickly enough to meet demand. Very different from cargo, of course, but if it makes economic sense, why not?

Another opportunity is conversion to LNG, which is expected to thrive over the next several years with rising demand in clean energy resources.

Bigger Ships, More Complex Cargo

But the issue for Joe Sheridan is what happens if more companies like Hanjin go under, specifically claims being filed for warehouse forwarding charges to pay for discharge of cargo at dockside, temporary warehousing and a replacement vessel to get cargo to its original destination.

“That’s where the claims are really going to come into play,” said the marine specialist at Lockton cargo and logistics. How insurance policies are written will be critical to how well container shippers fare going forward, he said.

Some underwriters, for example, attach sublimits to liabilities for a single occurrence. A bigger issue, said Rizvi and Sheridan, is the stipulation in some policies that each bill of lading be insured separately, in which case multiple deductibles would apply in exigent circumstances.

Continued reliance on megaships with their massive cargo loads and numerous clients poses an obvious challenge here, said Sheridan.

“If you go out and put a $10 million limit on one cargo account and a $20 million limit on another, you don’t know how many cargo accounts you have exposure to on one vessel because these ships are so big. There’s no way they can determine that.”

Bottom line, there’s an array of marine cargo insurance policies out there written along a broad spectrum of terms and conditions and it will be up to individual underwriters to determine how language changes or stays the same going forward.

Some underwriters and clients weren’t really hit very hard after Hanjin went under while others were, said Sheridan. But changes are definitely afoot.

“They’re asking, ‘Is this something that could happen again?’ I’ve been in this business for over 20 years and I’ve never seen anything happen of this scale and magnitude. Our argument is that shippers should take a hard look at these policies before these things happen.”

Still at Sea Over Low Demand

Blaeser was happy to see consolidation continue apace since his company’s report a year ago, notably the joint announcement that Mitsui O.S.K. Lines, Nippon Yusen and Kawasaki Kisen Kaisha are merging their container shipping businesses this July to begin operations in April 2018.

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Overall, the industry will enjoy stable business from higher, compensatory freight rates as fewer hands control the capacity side, said Blaeser, while “the benefits to the manufacturers and retailers that rely on their services will be decreased volatility and more reliability in terms of services.”

“But with consolidation we’re still not out of the woods,” Blaeser added. “If fewer hands don’t manage the global fleet in a tighter manner, then those benefits won’t happen.”

Non-market forces, too, “have weighed on the market to the detriment of the ocean carrier business,” said Blaeser. Governments, in particular Asian governments, have backed companies unable to make it on their own — neglecting one crucial economic factor: global demand.

“If governments, be they American or European or wherever, reverse track on their trading policies then that will inevitably hit demand ferociously,” Blaeser said. “Where demand might be threatened, the industry absolutely has to take it seriously.” &

David Godkin is a freelance magazine writer based in Toronto. He can be reached at [email protected]

Rates are likely to rise for many lines of insurance in 2019, and management liability is no different. In the year ahead, the management liability market will be “stable, but firming,” said Keith Riccio, Vice President, Management Liability and Specialty, Nationwide.

On average, companies can expect to see 10 to 20 percent increases in D&O pricing at renewal, which Riccio said is “significant, but warranted” given prolonged soft market conditions amid growing loss frequency and severity.

“If you compare the D&O market five years ago to today, it’s safe to say anywhere from 20 to 30 percent of premium has been taken out of the market,” Riccio said. D&O losses are reaching record levels thanks largely to the growing number of recent securities class actions.

“Securities class action frequency is at an all-time high for the past three years,” Riccio said. “In 2018, the total was up 200 percent from the 10-year annual average between 1997 and 2017, according to Cornerstone Research’s latest report on securities class action filings.”

That increase is being driven by these nine factors — some of which companies and their insurers have never had to contend with before:

1. Stock Market Volatility Drives Shareholder Litigation

Dramatic fluctuations in stock value tend to give rise to securities class actions by dissatisfied shareholders. In 2018, Wall Street experienced more highs and lows than in any prior year since the recession of 2008. Compounding the issue is that more law firms are capitalizing on the volatility by making securities litigation a core part of their business.

According to Cornerstone’s “Securities Class Action Filings, 2018 Year in Review,” a high number of IPOs in 2017 and 2018 have also contributed to more frequent securities filings. With 134 IPOs, 2018 was above the 2001-2011 average of 99 IPOs per year but remained well below the 1997-2000 average of 403 IPOs per year.

“Stocks offered in an initial public offering are more vulnerable to market volatility,” Riccio said. Going public during a downturn can immediately negatively affect stock value, disappoint investor expectations, and draw a lawsuit.

2. M&A Activity Means Merger-Related Lawsuits

Though the total number of mergers and acquisitions dropped slightly in 2018 over 2017, the trend of consolidation is still strong. Deal value also increased. Global M&A deals made through the first three quarters of 2018 were worth nearly $3.3 trillion, a 39 percent increase over 2017.

“Any time you have a merger or acquisition, there’s a chance you’ll see what’s called a ‘bump-up’ or merger-related lawsuit,” Riccio said. “That inflates the total class action number.”

According to Bloomberg Law, 204 new securities class actions were filed in first half of 2018, and more than 45 percent of them were merger-related.

3. Event-Driven Litigation Presents New Liability Exposure

Companies are increasingly facing liability action over catastrophic events. After the destructive wildfires that wrought havoc across California in 2017, for example, utility companies are facing allegations that their equipment played a role in sparking the flames.

“Energy companies have seen D&O claims arising out of their potential involvement in starting these fires,” Riccio said. “Events like this traditionally would not be perceived as a D&O exposure. It’s a new market dynamic leading to an increase in securities class actions, which is leading to increased losses in a market that hasn’t priced for it.”

4. Boards of Directors Face Accountability for Data Breaches

Securities class actions related to data breaches are growing more common and costly. “We’re starting to see D&O claims arise from data breaches and failure to disclose appropriately to the market information regarding any breach an organization suffered,” Riccio said.

Plaintiffs’ attorneys are quick to file suit on behalf of shareholders based on significant drops in stock value following the disclosure of a breach, and on allegations of misrepresentation in SEC filings regarding the strength of their cyber security prior to the breach.

In a recent high-profile case, Yahoo paid $80 million in September of 2018 to settle a securities class action alleging that the company repeatedly misled investors after four separate data breaches that affected as many as 5 billion accounts. Over the course of 2018, at least nine such actions have been filed against public companies related to a data breach.

5. Allegations of Sexual Harassment Imply Board-Level Mismanagement

Class actions may arise from allegations of sexual harassment against senior executives of a company but will target the entire board of directors over how they handle the situation. Lack of adequate disclosure about the incident or an insufficient response can hurt the company’s stock value and ultimately be fodder for a securities class action.

Plaintiffs can also allege that the company misled investors by not disclosing patterns of misconduct committed by senior executives and failed to acknowledge the negative impact of misconduct on the company’s reputation, legal liability exposure, and overall ability to operate. If company assets were used to make confidential settlements with accusers, then allegations can also include breach of fiduciary duty.

6. Social Media Amplifies Effects of Any Negative News

Social media adds fuel to the flame when it comes to many emerging sources of D&O exposure. The #MeToo movement, for example, has made accusations of sexual harassment front page news. Anger over incidents like data breaches or supposed liability for natural disasters can build and spread faster.

When negative news travels farther and lingers longer, it prolongs the impact of any negative event on a company’s stock price, sparks calls for further investigation, and may attract the attention of attorneys looking for a deep-pocketed target.

“Social media has played a role in giving rise to securities class actions that 10 years ago would not have been filed, simply because it creates an extended period of negative press that companies have a harder time coming out of unscathed,” Riccio said.

7. The Cyan Decision May Mean More Suits and More Defense Costs

In the case of Cyan Inc. v. Beaver County Employees Retirement Fund, the Supreme Court ruled early last year that securities plaintiffs could bring class actions against companies under the Securities Act of 1933 in in state courts.

“Prior to this decision if you had a securities claim in state court and federal court alleging breaches of the ’33 Act, they would be consolidated and move forward only in one jurisdiction. The Cyan decision says that the company cannot remove the state court lawsuit to federal court, even if there’s a parallel or identical federal court action. So that permits the lawsuits in state court and in federal court, with the same sets of allegations and facts, to go on side by side,” Riccio said.

“That’s causing more defense costs to be incurred on behalf of the company that’s being sued, and that’s causing more liability to the D&O marketplace because those defense costs may be picked up by a D&O insurance policy.”

8. Cryptocurrency Is Prone to Corruption, Volatility, and Litigation

Because it’s unregulated and its value swings so wildly, companies investing in cryptocurrencies are very vulnerable to securities litigation.

“The cryptocurrency marketplace has been extremely volatile, which has led to a lot of D&O litigation in that space,” Riccio said. “Any time you have a new unregulated investment vehicle, it’s just ripe for manipulation and corruption, and for people to get taken advantage of.”

Most cryptocurrency purveyors that go public with initial coin offerings — or ICOs — have been hit with a securities class action. Through the first half of 2018, at least 12 ICO-related actions were filed.

9. Mega Verdicts and Settlements Hit D&O Policies

Rising liability verdicts and settlements reaching into the multimillion- and even billion-dollar range also enhance D&O exposure.

“Any asset is fair game when you have a mega liability settlement, and that includes D&O insurance, whether the allegation is related to mismanagement or not. Plaintiffs’ attorneys will look for dollars wherever they can,” Ricco said.

The Right Partner Helps Withstand Volatility

During this time of historic volatility and rapidly emerging exposure, companies absolutely need stability in their D&O carrier.

“We’ve been in the D&O market for more than 10 years and are committed to the space; we’re A+ rated, and we’re stable,” Riccio said. “Even with rising securities class action frequency and increased loss costs, we strive for a price point that is fair to both sides.”

Companies can trust in that statement because, as a mutual company, Nationwide’s fiduciary duty is to its insured members, rather than shareholders. “Our obligation is to our members, so we work hard to truly partner with them,” Riccio said.

That mission includes providing a suite of both primary and excess products for companies of every size in any sector, so a solution exists for every member. A partnership philosophy also extends to the claims approach.

“We handle all claims in-house, and we have a tremendous expertise on that side of the house. Our claims professionals work closely with underwriters in order to adjudicate as quickly as possible. We’re always looking out for members’ best interests,” Riccio said.

As professional liability risk becomes more prominent and more unpredictable, carrier stability and commitment will be critical characteristics as the market adapts.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.

Nationwide, a Fortune 100 company, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by both A.M. Best and Standard & Poor’s.

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

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